NETFLIX sails into rough seas. What does Wall Street’s negative forecast mean for producers?

“Netflix: Your time in the sun is over!”

That’s the view of the influential Wall Street Analyst Laura Martin at Needham & Co.

Her recent stock downgrade note to investors briefly lopped several $ billions off Netflix’s market value.

  • What is she saying?
  • Is there a counter-argument?
  • And what does her negative Netflix forecast mean for the Unscripted market?

Watch the Analysis

  • Watch a brief and compelling interview with Laura Martin here. (7 min)

Competition Hits Netflix

  • Martin says that the new streaming services from Disney, Apple, HBO and others are eroding the Netflix business model.
  • Licensed hit programs like THE OFFICE and FRIENDS, as well as recent studio movie releases, drove Netflix’s rocketing consumer subscription base.
  • But the owners of these hit series, like NBC, are withdrawing them from Netflix for their new, owned streaming services, like Peacock.

Program Brands

  • Laura Martin argues that shows like THE OFFICE are more that ‘hits.’
  • Over 10 or more years they became program brands that add super-value to their platforms.
  • Netflix lacks its own comparable program brands.
  • Its hit series like STRANGER THINGS don’t compare in longevity and thus brand value to FRIENDS.

A Degraded Product

  • The loss of its licensed franchise series and studio movie releases means that Netflix will suffer a degraded product offer.
  • However, to compete with the new streamers, it must continue to spend big on Originals.
  • Netflix is reported to have spent $13 billion this year on new programs.
  • The hope is that critical hits like THE IRISHMAN and Attenborough’s OUR PLANET will attract new subscribers and discourage existing ones from defecting to Peacock to watch Golden Oldies like FRIENDS.

The Price Point Trap

  • An option for Netflix is to compete with Disney on price.
  • Netflix’s monthly cost is around $13:00.
  • Disney is priced at $7:00.
  • Apple TV Plus is $4:99.
  • However, Netflix can’t compete on price:
    • It lacks the balance sheet strength to drop its price.
    • Particularly because Netflix needs to spend that $13 billion / year or more on a deep stream of appealing Originals to attract and retain subscribers.

Standalone vs Bundler

  • Netflix is at a competitive disadvantage versus Disney and Apple because it is a standalone programming service.
  • Disney and Apple are “bundlers” whose financial models for their streaming services are blended with other business lines:
    • Disney can afford a $7:00 service if subscribers respond to discounted theme park promotions.
    • Apple can cross-promote its mobile devices and music services to Apple TV subscribers.

Pushback 1: International

  • Laura Martin forecasts that Netflix will lose around one third of its enterprise value in the face of competition from these much larger companies who enjoy more compelling program offers and diverse revenue streams.
  • However, I think that she may underestimate the contribution of international subscribers.
    • Netflix’s addressable market is “Internet Users who are capable of Video-streaming.”
    • My NETFLIX 2020 What You Need To Know Now! study reports that the ‘streamable’ segment is forecast to grow from 1.3 billion in 2019 to 4.5 billion in 2025, mainly outside the U.S.
    • As the leading streaming brand, and even with discounted subscriber rates overseas, Netflix and other global streamers enjoys significant international growth potential.

Pushback 2: The Ad-supported Option

  • Netflix execs consistently deny that they will introduce an ad-supported tier like Hulu.
  • Instead, the company is focusing on brand placement to offset some program costs.
  • However, “Where viewers have been given the choice (e.g. Hulu, CBS All Access) of paying more to avoid ads, or paying less to have a light ad load, the vast majority choose the latter.” (VideoNuze’s Will Richmond).
  • Netflix’s average viewing age is in the advertiser-friendly low Thirties, versus the Fifties and even high Sixties for most Cab/Sat channels.
  • Brands and agencies are hungry to reach Netflix’s youthful and targetable audience.
  • Why would Netflix leave that proven advertising revenue stream on the table at a time when its value is under fire?
  • I’m with the analysts who predict that faced with a mature U.S. subscriber base, Netflix will strengthen its business model by launching an ad-supported option, most likely in 2020.

Takeaways for Producers?

  • Wall Street sentiments are based significantly on how expected changes in a company’s profitability will drive its stock price.
  • Netflix may no longer be a Wall Street darling, but it will continue to fortify its competitive market share and subscriber satisfaction with heavy investments in Originals.
  • While Scripted series drive subscriber loyalty, Netflix will keep spending on Documentaries and Unscripted programs.
  • Unscripted is relatively budget-friendly versus Scripted: Note that THE IRISHMAN was budgeted at around $160 million.
  • The Documentary category enjoys buzzy press coverage and earns promotable award nominations – all out of proportion to its relative cost versus Scripted.
  • And documentaries motivate subscriber satisfaction and retention, even if their viewing and impact are a fraction of the Scripted category, as I reported in my coverage of Parrot Analytics’ Demand Expressions.

Peter’s Last Word

  • Wall Street may fall in and out of love with Netflix.
  • But Netflix still loves the documentary category.
  • For producers and program suppliers, the reality is that Netflix will remain a giant buyer and a very important opportunity.
  • To understand the Netflix buying landscape and find the key contacts at Netflix, read about my original, research-based study, NETFLIX 2020 What You Need To Know Now!
  • Save $50 by purchasing and downloading the Study now.